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A loophole in the law of contracts? The application of the duty to act honestly

In its recent decision in Burquitlam Care Society v Fraser Health Authority, 2015 BCSC 1343, the British Columbia Supreme Court may have expanded the potential use of the common law duty to act honestly as a means for contracting parties to seek legal recourse against public bodies outside the scope of their contractual rights.

(See this November 17, 2014 BHT Newsletter for a more detailed discussion of the duty to act honestly, as articulated by the Supreme Court of Canada in Bhasin v Hrynew)

BACKGROUND
In Burquitlam, the application of Bhasin was considered by Mr. Justice Macintosh in the context of an application for an injunction to prevent Fraser Health Authority (“FHA”) from terminating an affiliation agreement with the Burquitlam Care Society (“Burquitlam”) which related to the operation of a residential care facility in Coquitlam, BC (the “Agreement”).

FHA is a regional health authority which operates pursuant to the BC Health Authorities Act for the purpose of developing and implementing a regional health plan, developing policies, setting priorities and allocating resources for the delivery of health services in the Fraser Health region. Under the Agreement, Burquitlam was required to provide, among other things, certain residential care services with respect to 76 approved residents using the funding supplied by FHA. As well, both parties could terminate the Agreement without cause upon 365 days’ written notice to the other
party. When FHA informed Burquitlam it intended to issue its 365 day notice to terminate the Agreement and stop the related funding, Burquitlam commenced a legal action against FHA and sought, among other things, an injunction to prevent FHA from terminating the Agreement.

NO SERIOUS QUESTION TO BE TRIED
In seeking an injunction, the applicant must demonstrate that (a) there is a serious question to be tried; and (b) that the balance of convenience favors granting the injunction. The threshold for proving there is a serious question to be tried is typically low.

In this case, Burquitlam alleged that FHA had offended its common law duty to act honestly in the performance of its contractual obligations. Unusually, Mr. Justice Macintosh held that Burquitlam’s application for injunctive relief must fail at the first stage of the analysis, finding there was no evidence to suggest that FHA had lied or knowingly misled Burquitlam in their dealings leading up to the delivery of the notice of the intended termination. Without such evidence, there was no serious question to be tried warranting protection of the status quo, or otherwise supporting an injunction being granted by the
Court.

However, the Court left open the possibility that, in circumstances where the facts could reasonably give rise to the conclusion that one contracting party lied or knowingly misled the other party in matters directly linked to the performance of contractual obligations, or in the exercise of contractual rights, such evidence could give rise to a serious question to be tried which would weigh in favour of granting injunctive relief.

This case highlights the practical implications of not adhering to the duty of honesty described in Bhasin. Dishonest behavior may give rise to legal consequences in the context of contractual performance, even if the offending party’s acts are not offside their rights and obligations contained in the contract itself. Such behaviour may fall short of lying.

Knowingly misleading the other party to a contract may suffice.

IMPLICATIONS FOR BC’S HEALTH AUTHORITIES
Although FHA was not found to have done anything wrong, the Burquitlam case highlights the importance of how health authorities, just as any other contracting party, exercise their contractual rights. In exercising those rights, parties to a contract must ensure, for example, that their ongoing communications do not mislead the other side, such that they breach the duty articulated in Bhasin above. In doing so, a contracting party could lose certain rights otherwise available in a contract.

Had Burquitlam successfully demonstrated there was a serious question to be tried, Justice Macintosh was clear that
he would have granted the injunction, and FHA would have been prevented in the interim from exercising its contractual
right to terminate the Agreement until the trial of the matter determined the outcome.